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Market Makers in DeFi

July 11, 2023

A successful transfer of crypto assets requires sufficient liquidity, which is crucial for all cryptocurrency projects, especially DeFi ones. While some projects opt for automated market makers (AMMs), others choose to work with professional market makers, also known as liquidity providers. 

Traditionally, market makers have been associated with centralized exchanges. Yet, many decentralized platforms and services partner with them to attract more liquidity to DeFi and ensure a seamless exchange process. 

So, how can decentralized projects collaborate with market makers?

RFQ System

The RFQ (Request-for-Quote) system was made to attract professional market makers who typically prefer to trade on centralized exchanges instead of decentralized ones, hopefully helping to divert much-needed liquidity to DeFi. RFQs make it easier and safer for market makers to provide liquidity to these projects by allowing them complete control over what trades and when they may fill.

Here is how the system works: traders put their requests on a chain that all market makers can view. Market makers can then scan the requests, choose the ones they prefer, and fill them. Such a system enables them to create strategies to maximize profits while maintaining a suitable risk tolerance level. 

The RFQ model is also highly beneficial for DEX users because it protects them from price slippages and MEV attacks, such as front-running. Zero slippage and enhanced security against attacks are possible due to the signing of quotes by market makers, which ensures that rates remain unchanged.


RFQs enable truly decentralized peer-to-peer transactions. By working directly with market makers, DeFi users can diminish the control that centralized exchanges and affiliated market makers once had over the crypto market. Moreover, it allows more individuals to enter the growing DeFi market and try their hands at market-making.

However, several technical challenges must be addressed before any advancements in market-making can occur. Still, most market makers are highly experienced and technologically advanced individuals (or companies) with the necessary infrastructure and considerable funds. In order to make market-making more accessible to less experienced and equipped individuals, projects must work on technologies that can simplify the process and make it less resource-demanding.

Market Makers and Illiquid Markets

Despite the considerable progress in developing a secure and reliable infrastructure for facilitating transactions between buyers and sellers without the need for third parties, the lack of good market makers still hinders the growth of DeFi. While AMMs, popular among DeFi projects, help to facilitate trades, they struggle to function effectively in markets with insufficient liquidity.

That is why market makers are vital for maintaining adequate liquidity and facilitating smooth exchanges in DeFi, just as in CeFi. They are also essential in addressing the issue of high volatility that regularly affects crypto market participants. By consistently posting buy and sell orders, market makers help balance out fluctuations in demand and supply, keeping the market more stable and usable. Furthermore, market makers are particularly beneficial when executing high-volume orders and preventing price surges afterward.

Incentives & Arbitrage Opportunities

To encourage market makers to work with DEXes and provide liquidity for the most illiquid tokens, many DeFi companies offer them various incentives, such as a share of fees, discounts on different DeFi products and services, or LP tokens.

However, the main incentive for market makers is likely arbitrage opportunities. Since many tokens on DEXes have lower liquidity levels than on CEXes, their price rates can differ enough to make arbitrage trading far more profitable. As a result, market makers can support exchange flow, bridge liquidity between centralized and decentralized exchanges, and profit from their price differences.

Final Thoughts

Market makers are as crucial for developing the DeFi industry as liquidity pools and automated market makers. They help to provide sufficient liquidity, significantly increasing the convenience, speed, and cost-effectiveness of decentralized exchanges and related services. Moreover, thanks to the RFQ model, DeFi projects have the potential to shift the market-making towards being more decentralized and accessible for a wider audience of users who want to participate in the DeFi growth and have adequate resources.

Kinetex Network allows users to access market makers via the innovative second mode of the Kinetex dApp, Flash Trade. This mode will enable users to swap assets directly with market makers and market makers to build smart bots and compete for user orders. Stay tuned for the announcement of Flash Trade Testnet!

Kinetex Network: Website | Kinetex dApp